How Much Home Can I Afford?

The following article originally appeared on Unison.com

It’s the most important question when thinking about buying a home: how much home can I afford? Fortunately, the answer to this is not too difficult to find.

Below, we’ll walk you through how to get your answer.

How Much Income Do You Have?

One of the most important factors is your income. That’s because you’ll probably need to get a mortgage to buy a home.

Your mortgage will have monthly payments, and you need to make sure you’ll have enough money to afford those payments. As a general rule, experts recommend keeping your housing payments to about 30% of your “gross” (pre-tax) income.

As an example, if your salary is \$60,000 per year, then your monthly gross income would be \$5,000. Take 30% of \$5,000 and you get \$1,500. So in this example, you should aim to spend \$1,500 or less on your housing in a given month.

But that’s not the only factor to consider.

What is My DTI?

A lender will also look at your Debt-To-Income ratio (or DTI). This is a calculation that tells the lender how much of your income goes to debt payments each month.

See how a home ownership investment can double your down payment.

Here’s how you can calculate your own DTI: Add up all your monthly debt payments (mortgage, student loan, auto loan, credit card, etc.) and divide your income by the total.

Going back to our example above, if you have a monthly income of \$5,000 and a mortgage payment of \$1,500, plus a \$300 car payment and a \$200 credit card payment, then your total debt payments would be \$2,000. Since \$5,000 divided by \$2,000 is 40%, your DTI ratio in that example would be 40%.

Lenders generally prefer a DTI of 43% or lower when evaluating your mortgage application.

How Much of a Down Payment Do You Have?

The second most important factor – after your income – in determining how much home you can afford is your down payment. In other words, how much money do you have saved up to put into the home? If you have saved up \$40,000 and are ready to invest it in your new home, then you have a \$40,000 down payment.

In general, it’s best to have at least a 20% down payment, although you can buy a home with less. The size of your down payment, along with your income and DTI ratio, will determine how big of a loan you qualify for.

Learn how a home ownership investment makes it easier to buy a home.

If you don’t have enough of a down payment to qualify for the loan you need, you should consider using a home ownership investment from a company like Unison. With the Unison HomeBuyer program, the company matches your down payment funding, contributing up to half of the down payment. That means if you have \$40,000 then you can get an additional \$40,000 for a total down payment of \$80,000. There are no monthly payments or interest on the money Unison provides. Instead, Unison receives a portion of any future change in the value of your home when you sell. The additional down payment funds can come in handy if you want to afford more home, reduce your monthly payments, or keep some of your money for other investments.

Calculate How Much Home You Can Afford

It’s always a good idea to use a mortgage calculator to better understand how much you can afford to pay for a home. Here are a few calculators we recommend:

These calculators will help you see how much your total monthly payment will be, including principal and interest payments, property taxes, and mortgage insurance (if applicable).

Other Costs

You should also keep in mind that there will be other costs in addition to your mortgage:

• Repairs and remodeling: Many home buyers choose to do some remodeling on their new home to make it fit their needs and tastes. In addition, the home may need various repairs in the first year and beyond.

You will definitely want to account for these costs when deciding how much you can afford to spend on a new home.

Anticipating all of these costs will help you avoid coming up short or feeling that your finances are too squeezed after purchasing the home.

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